Your global digital VAT partner

Remove your digital VAT liabilities

EU expert group: ‘Digital economy is electrification of modern era’

Tue Mar 25, 2014

THE digital economy is the electrification of the modern era. That is one of the views of an EU expert group on taxing the digital economy which met throughout early 2014.

The EU’s expert group on taxing the digital economy have now held three meetings at EU HQ in Berlaymont. Photo: Getty Images

The group in their summary of the digital economy feel that if certain conditions are met that Information and Communication Technologies could increase productivity and innovation, thus leading to GDP growth in much the same way that electrification did in the late 1800s/early 1900s.

All of the meetings thus far have taken place at the EU’s Berlaymont HQ in Brussels. There the six internationally-renowned experts on the digital economy have gathered to plan the EU’s approach to how best tax the digital economy. Already the EU has implemented the first stage of this plan with the VAT Directive on electronically supplied services which comes into effect on January 1, 2015.

EU expert group’s *modus operandi*

The expert group – while keeping a keen eye on how this VAT Directive is embraced – is tasked with looking at the bigger picture. The EU knows that large multinational companies have not paid their fair share of direct tax but there are also wholesale issues related to indirect tax – i.e. VAT – and that’s where the expert group come in.

Is there a need for new tax rules specifically designed to foster the development of the digital economy?

A study in 2013 revealed that some €193 billion in EU VAT was unaccounted for through fraud, error, non-compliance and poor bookkeeping in 2011. This figure was a shocking statistic for the then Commissioner for Taxation Algirdas Semeta to stomach. It showed that numerous multinational companies are not just ignorant of the rules but arrogant enough to feel that they do not have to comply with EU law.

This incredible figure stung the EU into action and with the 2015 VAT Directive they revised and updated legislation originally incorporated in 2003. The key change is that – from 2015 – VAT will be determined based on the location of the end consumer. The EU envisage that it will close a loophole in the VAT system and level the playing field in the e-commerce sector between EU and non-EU businesses.

What happened at their March 2014 meeting?

As mentioned at the start of this post the EU expert group concentrated on its numerous benefits of the digital economy:

It is as important now as electrification was back in the late 19th Century/early 20th Century to the First World.

Digital technologies will increase competitiveness.

However, attempts to measure the existing digital economy proved problematic. Some highlights include:

One group – Boston Consulting Group – has estimated that the internet economy will be worth $4.2 trillion in 2016 to the G20 economies: up from $2.3 trillion in 2010. It also estimated that the internet economy is worth 8 and 12% of GDP in South Korea and the UK respecitvely.

The economic activity of the ‘App Economy’ is significant and growing. An industry report cites revenue of $10 billion per annum and total jobs of 790,000 in the EU alone.

Data as a source of value, though, is a key ingredient. The increasing capacity to collect, store and treat this information has led to the concept of ‘Big Data’, which has generated income in the public (government) and private (marketing) spheres.

Of course the dramatic growth of one industry also leads to control issues. The expert group’s working paper from their March 2014 meeting cited a few issues:

Increased permeability of borders creates a whole set of challenges for the VAT system.